Fundamental Terms and Concepts in Impact Investing
This article features key concepts in the impact investing language landscape. Visit our Impact Investing 101 page to find out more about impact investing in philanthropy and how to get started. This page also includes terms and concepts that often come up among foundations in particular when it comes to impact investing. Please reach out us if you have any suggestions or questions!
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- Don’t let definitions hold you back: Many terms are meant to differentiate degrees of commitment— to impact and to profit. But there is plenty of debate. As a result, phrases may be used interchangeably or in different ways than our descriptions below when you hear them in daily use. For us, these terms provide a useful framework to move towards a world where social impact is central to how we make financial decisions. Consider the terms as tools to reflect on perspectives, rather than as limits for your imagination.
- Keep up with the evolving field: The impact investing field is still changing, and with it, some definitions may also change. As you progress in your practice, consider keeping up to date on the definitions while noticing how organizations may be less strict in daily use or changing over time. This will help you ask critical questions on the commitment to impact as the field evolves.
What is Impact Investing?
Term coined in 2007 to describe a spectrum of investment practices intended to generate social and/or environmental impact alongside financial return. Achieving social impact is not a secondary effect or secondary priority in decision-making.
Impact investing is a way of thinking — not an asset class or product. It comes in many shapes, sizes, structures, asset types, and purposes. Based on the current prevailing thought, the hallmarks are intentionality (clear intent to make a social impact), impact measurement and management, and some degree of financial return. The impact investor seeks to make a specific impact as a result of their investment — and they’re going to find out if they were successful.
The idea of impact investing isn’t actually new. In fact, community development organizations and others having been making impact investments for decades using different terms to describe their work. These terms include mission investing, social investing, community investing, and more. One unifying phrase—“impact investing”—kickstarted a new way of organizing around finance for good.
Guided by this way of thinking, just about any individual or entity can be an impact investor. Examples include banks, community development finance institutions, diversified financial institutions, family offices, foundations, fund managers, governments, individual investors, insurance companies, nonprofits, pension funds, and religious institutions.
What is ESG? (Environmental, Social, Governance?)
A set of criteria that socially conscious investors use to examine how company behavior affects returns and risk.
ESG stems from the belief that companies with better ethical standards are more profitable in the long-term. “Environmental” criteria examine company performance as a steward of the natural environment. “Social” criteria examine how a company manages relationships with its employees, suppliers, customers and the communities it works in. “Governance” looks at company leadership, executive pay, audits, internal controls and shareholder rights. ESG differs from impact investing in that ethical business practices are seen as a way to retain or increase value or returns— not as important priorities in and of themselves. However, today, the criteria themselves are being applied in a variety of different ways to assess material non-financial factors that affect company behavior.
What is Sustainable Investing?
Applying ESG criteria to add or enhance value or profit.
Not to be confused with environmental sustainability, sustainable investing is based on the concept that applying ESG criteria can result in greater profit. An example of this may be investing in a solar company that presents an opportunity for greater return on investment.
What is Responsible Investing?
Applying ESG criteria to retain or maintain value or profit .
Responsible investing is based on the concept that applying ESG criteria can protect profit or mitigate risk. Responsible investing is driven by the idea that companies who do not consider ESG criteria may be less profitable in the long run. An example may be divesting from a coal company, due to the belief that it presents a financial risk.
What is Socially Responsible Investing?
Generally considering ESG or other ethical criteria in investing decisions .
Socially responsible investing is a term to describe investing activities where ethics or beliefs— irrespective of their likelihood to lead to profit or protect value — play a role in investing decisions. Although this term is used in a variety of ways, it tends to be associated with activities where ethics are in some way influencing decisions, such as divesting from private prisons. The degree to which a specific social impact goal, such as a reduction in overall private prisons or a correlated change in their use, varies.
Spectrum of Values-Aligned Investing Activities
The term impact investing is often used to describe a spectrum of practices that may overlap with — or include — responsible, sustainable, and socially responsible investing. How impact investing is used in daily dialogue may conflict with its strictest definition, which involves proactive efforts to seek change, demonstrated most clearly in impact measurement and a theory of change. As the field evolves, we'll update this page to reflect the most accepted views and frameworks.